MARKETS LIVE: Sensex extends losses for 4th session, Nifty dips below 9,900

The markets extended losses for the fourth straight session on Thursday taking lead from Asian markets, which traded in negative, following lower closing on the Wall Street.

Back home, investors will keep an eye on any development on the Sebi’s decision to restrict trading in 331 shell firms. The market regulator on Wednesday ordered stock exchanges to verify their credentials and fundamentals. In a letter to the exchanges, Sebi hinted if a company’s business model appeared satisfactory, the trading ban could be revoked.

Meanwhile, BHEL, GAIL, Petronet LNG, Bharat Forge, IOB, Adani Power, Union Bank Coffee Day Enterprises, GSPL and Gujarat Gas are among 340 companies scheduled to report their June quarter earnings later today.

MARKETS LIVE: Sensex extends losses for 4th session, Nifty dips below 9,900

Satyam case: Sebi to soon pass order on Price Waterhouse

Markets regulator Sebi will soon pass an order on global auditing firm Price Waterhouse for its alleged negligence and lapses in a nearly decade-old corporate fraud case involving Satyam Computer Services, regulatory officials said.

Sebi is investigating the role of the auditing firm which worked for Satyam between 2000 and 2008 and has been under the scanner for allegedly concealing the scam that came to light in January 2009 when the company’s founder B Ramalinga Raju himself admitted to fudging the books.

“The Securities and Exchange Board of India (Sebi) would soon pass an order against Price Waterhouse in Satyam case,” a regulatory official said on condition of anonymity as the final order is still being framed.


Sebi, which has been probing Price Waterhouse for a long time and was asked by the Supreme Court in January to expedite the matter, held a series of hearings with the auditing major and its officials during May-June this year.

The officials said the government has also received certain complaints regarding Price Waterhouse and it has asked Sebi to look into the matter.

When asked about submissions made by the group, a Price Waterhouse spokesperson said: “The matter is at procedural stage of the proceedings and thus no substantive submissions have been made, which shall be done as and when the occasion arises.”

The Supreme Court, in January, had directed Sebi to complete in six months its enquiry proceedings against Price Waterhouse.

Soon after the scam came to light, Sebi had issued show-cause notices to Price Waterhouse and its associates in February 2009. Further notices were issued to Price Waterhouse in 2012 under Fraudulent and Unfair Trade Practises (FUTP) regulations.

Pursuant to Sebi’s show cause notice, Price Waterhouse had moved the Bombay High Court, saying that Sebi being a stock market regulator has no jurisdiction to issue show-cause notice to auditors’ firm. Only a body such as Institute of Chartered Accountants of India can do this, it contended.

On the other hand, Sebi had said that auditors have “direct, fiduciary” relationship with shareholders and they had incurred losses due to decisions based on Satyam’s balance sheet. Later, the Bombay High Court ruled that Sebi had the powers to issue show cause notice to Price Waterhouse.

Following issuance of show cause notices way back in 2009, Price Waterhouse had submitted applications to the regulator seeking cross-examination of certain persons associated with the case. In December 2010, Sebi allowed cross-examination of some of the persons, but refused the same for a few others.

Later, Price Waterhouse had approached the Securities Appellate Tribunal (SAT) on the issue of cross-examination, following which the Tribunal last month asked the regulator to allow cross-examination of some more persons.

After nearly 7 years of investigation, Sebi in 2015 asked 10 entities linked to the main accused B Ramalinga Raju – including his mother, brother and son – to disgorge over Rs 1,800 crore worth of illegal gains made by them.

Besides, they were asked to pay close to Rs 1,500 crore as interest on the disgorgement amount, as the penalty was levied with effect from January 7, 2009 — the day Raju admitted to a massive long-running fraud at the company.

Prior to that, Sebi in July 2014 had barred Raju and other individuals from the securities market for 14 years.

After hearing appeal against these orders, the SAT in May this year directed Sebi to pass a fresh order with respect to the quantum of punishment given to Raju and four others.

While agreeing with Sebi’s finding that the individuals violated regulations, the tribunal also said the decision to uniformly restrain all the appellants from accessing the securities market for 14 years “without assigning any reasons is unjustified”.

Satyam case: Sebi to soon pass order on Price Waterhouse

Sebi joins fight against bad loans

The Securities and Exchange Board of India (Sebi) on Wednesday joined the fight against bad loans by providing several relaxations to the rules of share acquisitions in the case of distressed companies.

The market regulator said an investor gaining control of a stressed company in the listed space would not have to make an open offer. Also, Sebi’s pricing formula for acquisition of shares would not be applicable in such cases.

Currently, these exemptions are only given to banks, but the restructuring process hits a roadblock if the bank further decides to divest to a new investor.


“The Sebi board has taken decisions to facilitate the resolution of distressed assets, thereby contributing to the efforts made by the RBI (Reserve Bank of India) and the Insolvency and Bankruptcy Board of India,” said Ajay Tyagi, chairman, Sebi.

At the board meeting, Sebi took other key decisions such as banning participatory notes (p-notes) from taking naked positions in the derivatives segment, and easing the entry process for foreign portfolio investors (FPIs). It also removed the one-year lock-in requirement for private equity investors registered as alternative investment funds (AIFs) in initial public offerings (IPOs).

Sebi said acquisitions of stressed companies approved by the National Company Law Tribunal (NCLT) under the Insolvency and Bankruptcy Code (IBC) would be given exemptions from an open offer. Under the current rules, any acquirer buying 25 per cent in a listed company has to make an open offer to acquire another 26 per cent.

Sebi’s relaxation would keep the acquisition costs in check and also expedite the bad loan resolution process. The move comes at a time when the government and the Reserve Bank of India (RBI) are struggling to restructure about Rs 7 lakh crore worth of stressed assets.

Sebi said there would be certain safeguards for minority shareholders such as three-year lock-in for new investors and need for a special resolution to approve the new promoter. “I hope Sebi’s move will facilitate the restructuring of stressed assets,” Tyagi said.

Experts say Sebi’s decisions would ease the challenges faced by banks in restructuring.

“It is an important step from Sebi to facilitate a smooth restructuring process. However, it is not clear what pricing guidelines will apply if fresh shares were issued as preferential allotment or under a bid process where different bidders under resolution process provide different price offers,” said Darshan Upadhyay, partner, Economic Law Practice.

“The Sebi law directing open offer to the acquirers of such stressed listed companies could have been a big hurdle as it increases the cost of the deals. It is expected that soon many big stressed listed companies would undergo management changes in accordance with these schemes,” said Manoj Kumar, partner and head, Corporate Professionals.

Sebi also provided a boost to FPIs by proposing to ease the definition of broad-based funds and also the ‘fit and proper’ criteria. The market regulator also reduced the paperwork for FPIs coming in from countries that have diplomatic tie-ups with India.

On the other hand, Sebi further tightened the p-note framework by imposing a regulatory fee of $1,000 every three years on each ODI subscriber, starting April 1, 2017. It also said p-notes would be allowed to deal in derivatives strictly for hedging purpose.

“Sebi’s move to levy regulatory fee will increase the cost of investing in Indian market but may not be seen as a significant barrier. However, limiting p-notes on derivatives to hedging purposes only will not only negatively impact liquidity to some extent but also create artificial regulatory arbitrage,” said Suresh Swamy, partner – financial services (tax), PwC.

Tyagi said Sebi’s didn’t intend to completely ban p-notes as they were important for investors wanting to “test the India market” first before registering.

Concerned with high turnover in the derivatives segment vis-à-vis the cash segment, Sebi said it would soon issue a consultation paper on the equity derivatives market. Tyagi said there was a need to review the product suitability for retail investors.

Sebi joins fight against bad loans

Sebi scanner on valuation paid under compulsory delisting

The Securities and Exchange Board of India (Sebi) is training its guns at the promoters of companies that have been told to compulsorily delist, after public shareholders of several such firms moved the capital market regulator alleging that they were not being paid fair value by promoters.
Sources said Sebi had started seeking explanations from promoters on the mode of valuation.

Unlike voluntary delisting, where a company decides on its own to remove its securities from a stock exchange, compulsory delisting is a kind of a penal action against a company for not fulfilling the requirements under the listing agreement.

Typically, companies that are suspended from trading for not filing quarterly results or other disclosures are asked to delist by exchanges. Sebi last year asked such companies to provide fair value to public shareholders. The valuation is to be decided by an independent valuer.
Sebi received over a dozen of complaints from various public shareholders against the companies facing delisting for not following proper process. Sebi officials met all the stakeholders, including stock exchange officials and company representatives, earlier this week to discuss the issue.

“Sebi and exchanges want companies to follow the fair value criterion with proper due diligence,” said an official who attended the meeting. “The (delisting companies) were told to share the details of their third-party audit report, basis of assessment and list of fixed assets,” he added.

On the BSE and the NSE, 1,200 companies have been suspended for more than seven years.

“There have been a lot of complaints from investors on not being paid the fair value. However, we also need to understand that all these companies are very small, and promoters do not have enough resources to meet shareholders’ demand. The regulator should work out a middle path so that investors gets exit,” said Madhu Prasad, chairman, Keynote Corporate Services.

Sebi had recently amended the delisting rule which says the promoters of a company compulsorily delisted from stock exchanges cannot sell or pledge their shares until they provide a viable exit option to public shareholders, including buying them from the shareholders at a fair value.

Earlier, Sebi had empowered stock exchanges to compulsorily delist companies that violate the terms of their listing agreements or in which trading has been suspended for long periods. Promoters of such companies are barred from accessing the capital markets, directly or indirectly, for 10 years from the date of the company’s compulsory delisting.

“It is important for regulators to provide flexibility to promoters as well as a fair exit value to the minority shareholders. Current regulations provide for an opportunity to promoters to increase their shareholding but may be inadequate to ensure such exit is at a fair value to the non-promoter shareholders. Also, if a majority of the non-promoter shareholders don’t accept the offer price, such companies may then be required to be compulsorily listed,” said Darshan Upadhyay, partner, Economic Law Practice (ELP).

Sebi scanner on valuation paid under compulsory delisting

Sebi spotlight on BSE, NSE ‘dark fibre’

The Union finance ministry has asked market regulator Securities and Exchange Board of India (Sebi) to probe the alleged “dark fibre links” between the BSE and the NSE, and has been informed, in turn, that a “preliminary fact finding” exercise is already underway.

The BSE and the NSE have also been asked to provide inputs.

When asked about the issue, the former declined to comment, and the latter said the allegations were baseless.

Business Standard has reviewed the letters sent by the finance ministry to the Sebi the past few months, along with the internal notes, which were obtained under the Right to Information (RTI).

The documents showed that the ministry swung into action after receiving, in November, a whistle-blower account that talked about the “dark fibres” and other issues in high frequency trading (HFT).

According to the ministry note sent to the Sebi, “The recent letter from the whistle-blower dated October 3, 2015, talks about ‘dark fibre’ links between the NSE and the BSE that is available to select investors. This puts ordinary investors as well as large institutional investors at a serious disadvantage. It also opens the stock exchanges to unknown and unforeseen risk during periods of extreme price volatility.”

The ministry note added “proper investigation” is needed “to help save ordinary investors from ‘risks and dangers’ due to HFT or algo trading”.

The whistle-blower’s letter describes a dark fibre as “a dedicated fibre link, which has no switching equipment in its path”. In tech parlance, a dark fibre is an unused, surplus optic fibre line with a service provider, who leases it out for private use. The October letter is the third the Singapore-based anonymous whistle-blower has written on algo trading since January last year.

The first one alleged manipulations in the NSE between 2011 and 2014. It led to Sebi circulars, tightening regulations on collocation servers and became the subject of a Bombay High Court case. The second letter in August talked about the steps Sebi should take to prove the alleged manipulation and take action. The letters were addressed to Sebi and senior financial journalist Sucheta Dalal.

In response to an email seeking comments about the probe, the NSE spokesperson said, “As you know we avoid giving comments to any matter that is being heard legally.”

A letter from an anonymous whistle-blower in Singapore has prompted the authorities to investigate alleged ‘dark fibre’ links between BSE and NSE:
2015: Jan 14: First letter from whistle-blower, alleging manipulation in the NSE collocation centre
Aug 10: Second letter; focusing on steps to be taken by the Sebi to prove manipulation
Oct 3: Whistle-blower writes about ‘dark fibre’ links between the BSE and the NSE
Nov 18: Joint secretary of financial markets writes to Sebi chairman
Dec 14: Reminder sent from ministry to Sebi
Dec 30: Sebi replies; says fact-finding exercise underway. Matter discussed in Technical Advisory Committee
2016: Feb 17: Another reminder from the ministry
Sources: RTI documents, whistle-blower’s letters

The NSE spokesperson added the exchange and market participants used standard protocols as might be available from time to time. “Regarding your query with regard to our reply to the regulator, we always have clarified issues whenever asked for. Since such communications are bilateral, the same cannot be revealed. We have told you earlier also that NSE has always implemented fair practices and allegations as indicated in your email are baseless.”

A BSE spokesperson declined to comment.

According to the whistle-blower, a trading firm called AlphaGrep Securities benefitted from this ‘dark fibre’ link and managed to treble its market share in a few months.

AlphaGrep describes itself a proprietary trading firm focused on high frequency algorithmic trading in asset classes across the globe. It has offices in Mumbai, Bengaluru, Singapore and Hong Kong. “We are one of the largest firms by trading volume on Indian exchanges, and have significant market share on several large global exchanges as well,” the firm claimed on its website.

The whistle-blower said, “AlphaGrep figured out that major telcos would not be able to give faster access. It found a cable operator who had a fibre optic network a was willing to provide a ‘dark fibre’. A dark fibre is a dedicated fibre link which has no switching equipment in its path.

In the cash market segment, the BSE is a clear follower of prices at the NSE. It has less than 15 per cent volume of the NSE, and as a result all price changes first happen at the NSE, and are subsequently reflected at BSE.
If a trader can know the price at the NSE before others at the BSE collocation, he could benefit immensely.
AlphaGrep was able to achieve this by hiring a service provider who could provide this fibre optic link between Bandra-Kurla Complex, where the NSE is located, and Fort, where the BSE is housed.
According to the whistle-blower, this ‘dark fibre’ link between Fort and BKC (about 15 km) helped Alpha trade at a fifth of latency as the rest of the market helping it treble market share to 15 per cent between April and August 2015.

“In this case they found Sampark Infotainment which was willing to provide a near ‘dark fibre’ with minimal switching equipment. Sampark was, however, not a regular ISP and hence could not technically have access to NSE colo. It is NSE policy that they allow links to be terminated only by approved vendors (i.e ISPs) on dedicated MUX equipment at NSE colo. AlphaGrep with its muscle of volume and good contacts managed something no one is supposed to. It got its near ‘dark fibre’ terminated across NSE and BSE colo without Sampark being an empanelled vendor in April/May 2015. “At the BSE end their job was even easier as BSE does not own its collocation which is managed by a third party which does not have to follow any standards for link termination. The order of latency which they could get across the link was around 400 micro seconds. This was one fifth of what all others were having. If they could trade at one fifth the latency of the market the benefit is not hard to fathom.

“From April to August 2015, the market share of AlphaGrep rose from around five per cent to 15 per cent of BSE turnover. This speaks for itself,” the whistle-blower wrote.

The arrangement was legitimised post facto through an agreement with another empanelled service provider after other algo traders cried foul, the whistle-blower added. The AlphaGrep website claims that it has experience in development of low latency systems. “We are a team of curious engineers, mathematicians, and statisticians who like to solve challenging problems. We have past experience in quantitative trading and low latency trading system development at global proprietary trading firms and investment banks.” When contacted, Mohit Mutreja, managing director, AlphaGrep, said he was not aware of the letter.

In an emailed response to queries, Mutreja added five-year old AlphaGrep’s average daily traded volumes over the past one year represented two to three per cent of daily BSE volumes.

“AlphaGrep does not have any commercial relationship with Sampark Infotainment. AlphaGrep only contracts with exchange-empanelled vendors for exchange connectivity,” Mutreja said.

An email seeking comments sent to Prakash D’Souza, managing director, Sampark Infotainment, did not elicit any response.

The RTI documents showed the first letter to Sebi was written by the ministry in mid-November.

After a reminder from the ministry a month later, Sebi on December 30, 2015, informed that a “preliminary fact finding exercise is already underway”. The matter has also been discussed in the Technical Advisory Committee of Sebi, the regulator told the ministry.

On March 19, Business Standard had reported that the TAC had submitted a report on the matter, which some people described as “hard-hitting.”

Sebi spotlight on BSE, NSE ‘dark fibre’